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By XE Market Analysis September 18, 2019 3:45 am
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    XE Market Analysis: Europe - Sep 18, 2019

    The Dollar majors have been holding narrow ranges so far today, with AUD-USD and NZD-USD relative outliers in showing respective declines of 0.2% and 0.3% heading into the London interbank open. USD-JPY has maintained a narrow range in the lower 108.0s and EUR-USD around the 1.1065-70 mark, consolidating after rebounding yesterday from Monday's bout of dollar-driven losses. The Dollar itself had attracted a safe haven bid in early-week trading as markets reacted to news of the drone attack that took out about half of Saudi oil production and distribution facilities, though this petered out as oil prices staged about a 50% retracement of the surge seen on Monday (which was the biggest one-day rally in over a decade ), catalyzed by a report that suggested that production could be restored much faster than initially feared. Another factor that saw the Dollar bid weaken was the Fed's $75 bln injection into the financial system. Markets are now looking to the Fed's policy announcement today, where we expect a 25 bp cut and communication that pegs the move more as a mid-cycle adjustment and less as a second cut in a protracted easing cycle. The BoE, SNB and Norges Bank are due to make policy decisions tomorrow. The BoE is likely to a non-event, with no-change widely anticipated. The SNB is also expected to maintain unchanged policy, while the Norges Bank is expected to buck the global trend with a 25 bp hike. On the Brexit front, the UK Supreme Court is hearing the government's appeal on the ruling from Scotland's highest court that the government's suspending of parliament was illegal. A decision is expected tomorrow. Most likely, although not a certainty, it will agree with the recent court rulings seen in England and Northern Ireland, that the matter was "non-justiciable" -- being political rather than a legal matter.

    [EUR, USD]
    EUR-USD has settled around the 1.1065-70 mark, consolidating after rebounding yesterday from Monday's bout of dollar-driven losses. The dollar itself had attracted a safe haven bid in early-week trading as markets reacted to news of the drone attack that took out about half of Saudi oil production and distribution facilities, though this petered out as oil prices staged about a 50% retracement of the surge seen on Monday (which was the biggest one-day rally in over a decade ), catalyzed by a report that suggested that production could be restored much faster than initially feared. Another factor that saw the dollar bid weaken was the Fed's $75 bln injection into the financial system. Markets are now looking to the Fed's policy announcement today, where we expect a 25 bp cut and communication that pegs the move more as a mid-cycle adjustment and less as a second cut in a protracted easing cycle. The Dollar is not likely to be greatly impacted by the Fed, assuming it delivers nothing more than a quarter point cut and its forward guidance is near to our expectation. The favourable yield carry of the Dollar -- 1.8% for the 10-year U.S. T-note vs nearly -0.5% for the benchmark Bund and -0.15% for the 10-year JGB -- along with the fact that the Treasury market stands as the biggest, most liquid risk-free asset market in the world, means that the U.S. currency is likely to remain underpinned, much to President Trump's chagrin, no doubt. This view assumes, of course, that the Fed doesn't abandon prudent fiat-currency management and resists pressure from the executive for gung-ho on monetary easing. The Fed's move will be juxtaposed to last week's ECB promise of open-ended asset purchases.

    [USD, JPY]
    USD-JPY has settled to a narrow range in the lower 108.0s, holding below the seven-week high seen yesterday at 108.37. The pair is amid its fourth consecutive week of ascent. The gains have mostly reflected an unwinding in the Yen's safe haven premium as both the U.S. and China show signs of wanting to come to some sort of resolution on the trade front. Broader demand for Dollars has also been in the mix. USD-JPY has support at 107.67-70, and resistance at 108.65-67.

    [GBP, USD]
    The Pound has steadied after putting in an upward spurt yesterday. Cable clocked a two-month high at 1.2527. This builds on what has been about a one-month phase of sterling outperformance, reflecting a broader correction from major-trend lows as markets took a more circumspect view of no-deal Brexit risk. The UK Supreme Court is currently hearing the government's appeal on the ruling from Scotland's highest court that the government's suspending of parliament was illegal. A decision is expected tomorrow. Most likely, although not a certainty, it will agree with the recent court rulings seen in England and Northern Ireland, that the matter was "non-justiciable" -- being political rather than a legal matter. Most likely, Brexit will be delayed to January 31 and a general election staged in late November or December. The election will presumably be the final Brexit battle. One of four endgame scenarios will be produced by the election, depending who the victor is, or what possible inter-party alliances or coalitions prevails: 1, a no-deal Brexit on January 31 (which would be the fruit of a possible Conservative-Brexit party coalition); 2, Brexit with a deal and transition phase (the Conservative Party's preference, though the party would have to win the election outright, which there is potential for, and reach an accord with the EU, which would be an uncertainty); 3, Brexit with a deal and multi-year transition period, but also subject to a "confirmatory" referendum (which is the position of Labour and SNP); 4, Brexit cancelled (which is the position of the Liberal Democrats).

    [USD, CHF]
    EUR-CHF has printed a fresh seven-week high just above 1.1000, extending the rebound from the early-September 26-month low at 1.0811. The pickup in risk appetite in global markets, and reduced risk for a no-deal Brexit, has fostered an unwinding in the Franc's safe haven premium (such as it is given the punishing -0.75% deposit rate in Switzerland). The SNB's quarterly policy review is up this week, on Thursday. The central bank is widely expected to hold steady for now while stressing that it remains ready to intervene in forex markets if necessary.

    [USD, CAD]
    USD-CAD has recovered to levels above 1.3250 after Monday's sharp dip to a 1.3210 low. News of the drone attack on Saudi oil facilities was taken as CAD buying cue by markets in early Asia on Monday, though the trade ran out of steam as oil prices steadied and then rebound sharply, yesterday, on a report that suggested production could recover much quicker than initially feared. Saudi Arabia has also stated that it will tap into stockpiled crude to maintain exports for a period, while the U.S. and Japan have said they will release oil reserves if necessary. Nonetheless, the geopolitical situation in the Mideast is fragile, especially with the U.S. openly considering taking military action against Iran, which it suspects of being involved. USD-CAD has resistance at 1.3287-90.

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